Do You Have a Money Plan?
One of the biggest stressors in life is money or lack thereof. Since personal finance, let alone financial independence, is not often taught in school many of us feel this financial stress. Being in debt, living paycheck to paycheck, or lacking retirement savings as you approach your later years are serious concerns that can wreak havoc on mental and physical health.
Unfortunately, most of us are not taught even just the basics of personal finance in school or by our parents. Many of us may have parents who struggled financially themselves. But there is help out there for those interested in learning how to achieve financial independence without smoke and mirrors.
“If we command our wealth, we shall be rich and free. If our wealth commands us, we are poor indeed.” –Edmund Burke
Almost four years ago I stumbled across some personal finance blogs that introduced me to the concept of FIRE (financial independence / retire early) which helped me reign in my finances, eliminate debt, prioritize saving and investing, and chart my path to financial freedom.
Principles of FI/RE
FI = Financial Independence – Having enough savings, investments and/or passive income to provide and maintain for yourself and family. Not needing to actively work to receive an income to sustain life.
RE = Retired Early (or striving to Retire Early) – Having achieved FI pursues new interests outside of actual work/traditional job for a paycheck, before the typical retirement age range of 62 – 65.
What’s Enough for Financial Independence?
Numerous factors go into determining what is sufficient for financial independence or retirement and we will dive into many of them in coming articles. For now, two are listed below.
Rule of 25 – A rule of thumb suggesting that when you achieve 25x your annual spending in savings, you should be able to retire. ($50,000 x 25 = $1,250,000).
4% Rule/Safe Withdrawal Rate – Guideline used to determine the amount of money that can be safely withdrawn annually from retirement/investment accounts so that the funds last a minimum of 25-30 years.
These guidelines are occasionally debated, and some aim for a Rule of 30 or higher annual spending in savings or lower safe withdrawal rates, such as 2.5 – 3.5%. Some interesting perspectives are here, and here. This is a good recent summary from a financial planner as well.
“The best thing money can buy is financial freedom.” ~ Rob Berger
Getting There: The Journey to Financial Independence
It will take some time to reach financial independence but maybe less than you think. Many are accomplishing it in 10 – 15 years. It certainly doesn’t have to take the 40 plus years you may have grown up believing. If you aren’t already started on a plan, I strongly urge you to start today. I outline how below.
Track your spending, and know where your money goes.
Do you know what you spend on food? Clothes? Lunches out? Entertainment? To make a solid financial plan, you need to know why, when, how, and what you’re spending money on.
Tracking can be done easily in a variety of ways. Software programs such as Mint (free), Personal Capital (free), YNAB, Quicken, and Prosper Daily (free), can automatically sync with your personal accounts to allow convenient checks on your finances daily.
You can also track spending on an Excel spreadsheet or even a with a notebook and pen. With any method make sure you note each and every expense, including the quarters in the vending machine. It’s so important to know where your money is going. This exercise can be a huge wake-up call for some, and it can definitely be the start of a transforming financial turn-around.
Spend less than you earn, and save the difference.
With at least a month’s worth of your spending tracked, you will be able to get a better feel for the difference between what you are earning and what you are spending. After several months, you can hone in on where your money is going and what the gap between your incoming and outgoing finances are.
This difference is often referred to in the personal financial world as your gap. The better you mind the gap – saving it and investing it – the better off you can be.
Save early and often. Don’t wait!
Sure if you are only in your 20’s or 30’s you may think you have plenty of time to save. It’s true, you do have time on your side, but that’s all the more reason to start now. You’ll enjoy the advantage of compound growth, and it will take you less in total inputs to savings to reach a certain dollar amount than it would someone starting later in life.
If you are past 40, then you no longer have as much time, so you need to start now. The standard recommendations for saving 10% or so aren’t going to cut it either. If your income is $80k per year, at 10% savings, that’s only $8k per year or less than $700 per month your saving. I refer you back to the chart above.
If you are saving less than $700/mo, you should have started before you turned 30 if your goal is even close to $1M at retirement. The farther you are from your 20’s, the larger percentage of your income you should be saving for a typical retirement age. Want to retire before your 60’s it may require savings rates of 50% or more. I know of people saving 75% and higher even to reach their goals.
Facing your 50th birthday or more and have no or very little saved? Know that you are not alone, but don’t let that comfort you. Do everything you can to slash your expenses and start saving money today.
You might think you’ll just work longer, say until your late 60’s or early 70’s, however, you may find you won’t be able to. Health concerns (your own or a loved ones) or company downsizings may force you into a retirement that you are not financially prepared for. Please don’t let that happen to you.
There is a tremendous amount of wonderful advice out there to help you find ways to save money. Reach out to me, and I will gladly assist you in finding the right avenue. See this fantastic list of personal finance bloggers as well to find others you resonate with.
Avoid personal debt and eliminate any debt as soon as possible. Sooner even.
Paying interest on any personal debt is like giving your money away without the benefit of the feel-good emotions you derive from charitable giving.
“Never spend your money before you have it.” –Thomas Jefferson
I used to think if I could afford the payments on debt then I could afford the item I was financing. Today, it seems far better to me to save the money for the desired purchase first and buy it free and clear, than finance it and continue making payments long after the buy. (I’m not talking houses and mortgages here).
Cut unnecessary expenses. Doesn’t mean going without.
Yes, people survive without cable, eating out, Amazon Prime, gym memberships, and more. Look back at your spending tracking and be creative. How can you eliminate reduce some expenses or eliminate them altogether?
Be consciously frugal and intuitively smart when spending on wants and needs. It’s personal.
This goes with the point above. If something is important and actually valued by you, don’t cut it out completely. Just consider how you may still enjoy the want less expensively. For example, it is important to me that we eat organic foods and natural foods whenever possible, so I don’t scrimp on the food budget and find savings elsewhere.
Don’t over buy – right size your house & cars.
Early in life, I thought the bigger the house, the better. My ex-husband and I started in a home with less than 1000 sq. ft. We then went to just over 2000, and finally almost 4000. With bigger homes comes larger purchase prices, greater operating and maintenance expenses, more cleaning and time requirements, landscaping, etc.
When John and I bought our current home, we kept all that in mind. We purchased a house with a mortgage payment well below what we could afford to pay every month on just his income alone. Check out this post for my feelings on cars these days.
Know your net worth. It speaks volumes.
Aside from tracking spending, this was the best thing I did to get us on a proper financial path. Seeing a snapshot of our finances in an easily readable format was a real eye-opener. I continue to update our net worth monthly as it is motivating for me. Others update theirs quarterly or annually; you’ll find what works best for you.
Some of the financial software companies mentioned for tracking your spending above also track net worth. I use Personal Capital along with my Excel spreadsheet because I’m a bit nerdy when it comes to personal finance. An excellent Excel SS can be found on the popular blog Budget’s Are Sexy, which you can download and use for free – you will find it at the bottom of this post in the PS.
Dare to be different and don’t follow the herd.
Just like all other dimensions of wellness, financial wellbeing begins from the inside-out. Find clarity on what is important to you (wants/needs). Understand how money is involved in your life conceptually and physically, and what you need for a sense of security.
Personal Finance needs to be made personal. Buying whatever everyone else is buying – following the herd – is not personal, unless of course, it’s a bona fide need.
For your successful journey to financial independence:
- Know yourself – what will help you sleep better at night? No mortgage, 6-month emergency fund, or $500k in investment accounts
- Discover your truths – what are your values and are you living up to them? If you value family but work 60 hours a week to provide money for toys and playthings, you may not be living up to your values
- Collect information – learn about 401ks and IRAs – both Traditional & Roth, after-tax investments – stocks, bonds, etc., flexible savings accounts, health savings accounts, research interest, and more
- Create your own path – keep all of the above in mind when making a financial decision. Do what’s right for you and your family. Live by your values, not your siblings, neighbors, bosses, or friends. Save, invest or spend so that you sleep better at night for years to come.
Are you doing any of the above to reach financial independence? All of the above? I’d love to hear your accomplishments, thoughts, or any questions in the comments below. Thanks for reading!
Article most recently updated on 04/14/17